A Taxing Problem: Diminishing Progressivity in the U.S. Tax System

An Interview with Robert McIntyre

Robert McIntyre is director of Citizens for Tax Justice, the leading research and advocacy group working for tax fairness at the federal, state and local levels. McIntyre has written hundreds of articles on tax policy issues, in publications like the Washington Post, the New York Times and academic journals.

Multinational Monitor: How much does the average person in the United States pay in local, state and federal taxes?

Robert McIntyre: Federal taxes, including everything, amount to about a sixth of a person’s or couple’s income. State and local taxes add another 12 percent, for a total of about 29 percent. In dollars, that averages a little over $10,000 a year.

MM: How progressive are the tax structures?

McIntyre: At the federal level, which is progressive, poor people pay the least, about 8 percent of their incomes. Rich people pay a little over a quarter of their income in taxes. The middle people are in the middle.

On the state and local level, it is flipped: Poor people pay the most, about 13 percent, the middle people pay around 12 percent, and the richest people pay around 9 percent.

MM: Overall, what kind of impact do taxes have on income and wealth distribution?

McIntyre: They even things out a little. They are just a little progressive overall; it does not have a major effect.

Of course the tax system funds a lot of government programs, some of which help the lower incomes, some particularly help the higher incomes, like defense and all the things the government does that help business.

MM: What proportion of the federal tax take comes from corporations?

McIntyre: It is down these days to about 7 percent, about the lowest it has been in a generation.

MM: What is that down from?

McIntyre: It was 12 to 13 percent when Clinton was still president. Then the combination of various Bush tax cuts for corporations, adopted at the beginning of 2002, and all the tax sheltering that the companies are doing these days has pushed it down to about 7 percent.

MM: What were the levels in the years before Clinton?

McIntyre: In the sixties, corporations paid about 22 percent of all federal taxes. In the seventies, that fell to 15 percent. It plummeted in Ronald Reagan’s first term, down to as low as 6 percent. It then made a comeback to some degree, after Reagan reversed his policies, but now it is back way down again.

MM: How were the benefits of the first Bush tax cut allocated?

McIntyre: Bush’s first tax cut affected the personal income tax. By the time it is fully phased in, just over half of it will go to the best off 1 percent of the population.

MM: What would be the impact of the current plan?

McIntyre: Bush’s current tax cut plan has many pieces. The part that they are serious about getting enacted this year is the $726 billion part of their $1.6 trillion in total proposed tax cuts. A little over a third of that part would go to the richest 1 percent. Included in that $726 billion is Bush’s proposal to eliminate most taxes on corporate dividends. About half of that would go to the richest people.

Of the $726 billion total, just under half would go to the top 5 percent, 60 percent to the top tenth and about three quarters to the top fifth.

MM: Do the bottom income groups get anything?

McIntyre: The bottom 60 percent get 8 percent of it.

MM: What is the current status of the estate tax?

McIntyre: It is being phased out. Between 2001 and 2009, the estate tax exemption is scheduled to increase and then in 2010, the tax is slated to disappear, kaput!, kaboom! Technically, it is supposed to be reinstated the following year. But nobody really expects that.

MM: And how are those benefits distributed?

McIntyre: Well, you know, only 1.5 percent of all estates pays any estate tax, and the benefits of repeal will go overwhelmingly to the richest of those. So this tax cut is almost all for the very, very wealthy.

MM: Why has there not been warmer support from the corporate sector for the Bush administration’s dividend tax proposal?

McIntyre: Well, the executives warmed up to it once they checked their own portfolios, plus they have been under a lot of pressure from the administration to support it.

Initially, they were cool to it. In part, that was because they thought if they are going to give them a subsidy, they’d just as soon it went to the companies, rather than the shareholders. In part, it was because some of them had some fears that the shareholders would be mad at them if a company’s dividends turned out to be taxable because the company was avoiding paying sufficient corporate income tax to qualify for tax-exempt dividends. Overall, most of them seemed to think it would not do much for their companies and thus, from their point of view, was a waste of money.

MM: In broad outlines, if you could scrap the entire existing tax system, both the federal code and the state and local taxes, and put something else in place, what would be the guiding principles of the replacement system?

McIntyre: What we would like to see is a progressive system that taxes people based on their ability to pay.

The one tax that does that pretty well is the income tax. You need both a personal and corporate income tax, by the way, or the income tax falls apart. So I’d like to see a system that taxes people on what they really make, not on some figment of their accountant’s imagination, and does so at progressive rates.

MM: How high should the top rate be?

McIntyre: Well, if you are going to treat capital gains the same as other income, and that is an important thing to do, you probably cannot get much higher than 35 or 40 percent before the pressure for capital gains breaks just gets too high.

But you could pick up something extra in terms of progressivity by having a wealth tax or an estate tax, too.

MM: And what would be the tax burden on lower income groups?

McIntyre: Right now the federal income tax is negative on lower income people with children, rightfully so I think, given that they don’t have very much money. That’s due in large part to the Earned Income Tax Credit — a refundable tax credit for low-income working families. It is a commendable program that sends a considerable amount of money to people that really need help, although it could use some substantial tweaking.

I would probably keep the social security payroll tax pretty much as it is, so even low-income people would pay some federal taxes, but not much.

MM: Would you eliminate sales tax?

McIntyre: You could. If you eliminated the state sales taxes, then of course you would have to raise state income taxes a lot. That would be OK with me. Certainly, the states that have very heavy reliance on sales taxes ought to rethink it. Those are states that generally do not have income taxes, and have very regressive tax systems.

MM: What is the proper role for property tax?

McIntyre: The property tax is not that bad of a tax as long as it’s structured right. It would be nice if more states would adopt homestead exemptions so that the homeowner part of the tax becomes progressive, and there is some clean up to do on some of the business property taxes. But the property tax is not the world’s worst tax. One advantage is that it encourages people to support public education. That’s because it’s generally a local tax, so it is the taxpayers’ kids that the money goes to.